Money: The Dangers of the U.S. Hard Line

THE issues in the international monetary crisis are too complex, and the divisions between the U.S. on one side and Europe and Japan on the other too deep, for anyone to have expected a full resolution to come out of last week's series of meetings among international moneymen. There had been hope, though, that at least some hard bargaining could start. Instead, the key meeting, a midweek gathering in London of finance chiefs of the world's ten richest industrialized nations, deteriorated into a testy confrontation that left the officials unable even to agree on what they will talk about when they convene again in Washington on Saturday. The impasse deepened the danger that President Nixon's monetary initiatives will produce not the much needed overhaul of the world financial system that he aimed at, but a trade war that will pit the U.S. against much of the rest of the world.

Financial Theatrics. The London meeting of the so-called Group of Ten* marked the debut of U.S. Treasury Secretary John Connally as an international financial negotiator, and he put on a rare show of obstinacy. In one sentence, he managed to describe a key U.S. demand as both "stunning" and "very conservative"; he then added that it is "not subject to negotiations or trading." At one point, he asked the Europeans what they were prepared to do in order to get the U.S. to drop its 10% surcharge on foreign imports, then theatrically cupped his hand to his ear and announced: "I don't hear any suggestions." When France's Valery Giscard d'Estaing asked a series of moderately worded questions about the U.S. view of the role of gold in the international monetary system, Connally replied: "I am not prepared to give an answer to those questions here."

The Texan's performance left many European officials still puzzled as to what the U.S. really wants right now. The Nixon Administration's eventual goals, of course, are both clear and laudable: a new financial system with more flexible exchange rates based on a frank recognition that the dollar is no longer worth its stated value in many foreign currencies, and a revision of world trade rules that would enable the U.S. to increase its exports and wipe out its balance of payments deficit. That is a bold program; the difficulty is that no one knows quite how to accomplish it. The danger is that, having seized the initiative in getting negotiations started, Nixon and more particularly Connally will push other nations too far too fast down a road that is still dark.

Certainly, what the Europeans heard from Connally in London seemed to them too arrogant to be believed. Connally's one specific, and supposedly nonnegotiable, demand was that the other nations help the U.S. achieve a $13 billion-a-year swing in its trade balance, from a heavy deficit to a comfortable surplus. How? Presumably by some combination of upward revaluation of major European currencies and the Japanese yen, the removal of barriers against U.S. goods--which are higher in Japan than in Europe--and the assumption by other nations of more of the cost of maintaining U.S. military forces overseas. How to achieve such a combination, however, Connally did not say. His position seemed to be that it is up to the foreigners to figure out some way to meet the U.S. demand.

This hard and aggressive line only hastened a split of the Group of Ten into two camps: the U.S. and what some Americans now call "the Nine." Before facing Connally in London, the European Common Market nations met in Brussels to agree on their position. Giscard and German Economics Minister Karl Schiller, whose mutual antagonism had deadlocked previous meetings, showed a new amity. The Europeans agreed to press for a devaluation of the U.S. dollar, to be accomplished by raising the price of gold as part of a general currency revaluation. They also resolved to call for speedy abolition of the U.S. import surcharge in any overall trade deal.

In London, the Europeans held to this stand despite Connally's pressure. At one point, Schiller gently twitted Connally, who uses the term "burden sharing" to describe the U.S. demand that other nations pay more of the costs of maintaining American troops overseas. Schiller insisted that the dollar must be devalued as the U.S. contribution to a general realignment of currency values, and added: "In this area, too, we would need to achieve some burden sharing." He took care to say the last two words in English.

The net result was that the Ten failed even to draft an agenda for their next meeting.

Bargaining Lever. It is highly uncertain how long this impasse will last. The question of whether U.S. dollar devaluation should be part of the general change in currency values is more a matter of psychology and political prestige than of basic economics. The end result of a currency realignment accomplished either by foreign revaluations alone, or by U.S. devaluation accompanied by foreign revaluations, would be the same: the dollar would buy fewer yen, marks and other major currencies. A small dollar devaluation, however, would constitute an important symbolic recognition by Washington that the dollar's troubles are largely the result of U.S. inflation and balance of payments deficits, rather than somehow the fault of the strong-currency nations. The U.S. could well agree eventually to a small increase in the gold price as part of a package deal to set up a more flexible and realistic system. Federal Reserve Chairman Arthur Burns, who accompanied Connally to London, left the impression that he recognizes that this may be necessary.

The U.S. import surcharge presents a difficult problem of timing. Getting rid of it is a high-priority item for the Europeans and Japanese, whose sales in the lush U.S. market will soon be hurt by the tax. But the Nixon Administration is reluctant to give up the bargaining lever that the surcharge provides, and the President last week hinted that the tax will be around for quite a while. Still, the Europeans' main demand at the moment is reasonable: that the U.S. spell out clearly its conditions for dropping the surcharge. The toughest issue is the size and speed of a switch in the overall U.S. balance of payments, which went into the red by a record $5.8 billion in the second quarter. The Nixon Administration calculates that under present conditions and without the surcharge the American deficit, just in trade with other nations, would balloon to a $5 billion annual rate by 1972 as the U.S. economy moves back toward full employment and sucks in more imports. Instead, the U.S. wants to achieve a trade surplus of $8 billion; the difference between that and a $5 billion deficit produces Connally's figure of a $13 billion switch. Some $6 billion of the $8 billion trade surplus would go to finance U.S. business investment and military spending overseas; the remaining $2 billion would be a margin of safety.

To the Europeans and Japanese, this looks like an astonishing demand that they change their currency values and offer trade concessions so that they may swallow an additional $13 billion of

U.S. goods and services annually--and do so for the express purpose of enabling the U.S. to go on buying up foreign industry and acting with a free hand militarily around the world. Moreover, the U.S. position seems to be that this switch should be accomplished in the breathtakingly short period of about one year.

The Europeans, however, cannot simply refuse to cooperate in a U.S. attempt to wipe out the balance of payments deficit, which they have often, and justly, denounced as the chief threat to world financial stability. They seem willing to bring about a switch of around $10 billion annually in the U.S. payments position, though they think that this can be accomplished only over a period of several years.

Failing the Test. The immediate trouble is that Connally's negotiating method is to press the other side to the limit, and to see what concessions can be wrung out before offering anything in return. That tactic may work at home, but Europeans do not bargain the way Texans do. Unpublished sections of a report adopted by the 55-member council of the General Agreement on Tariffs and Trade, meeting in Geneva last week, indicated the danger. The report warned that if the U.S. import surcharge is still in effect by Jan. 1 and prevents the U.S. from carrying out the final phase of tariff cuts agreed to in the Kennedy Round negotiations, GATT nations would be compelled to retaliate --in short, it predicted a trade war.

Such an outcome would be the opposite of what the Nixon Administration says it wants: a reformed international monetary system and freer trade. Those are worthy and indeed indispensable goals, but Connally's method of pursuing them so far is failing the first test of effective negotiation. It simply is not producing the intended results.

* Really a Group of Eleven, because representatives of Switzerland, which is not formally a member, sit in as "observers." Full members are Belgium, Britain, Canada, France, Italy, Japan, The Netherlands, Sweden, the U.S. and West Germany.

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